As the Fed continues its policy of an interest rate close to zero, many investors are looking for alternatives and I believe dividend stocks are the answers. It is necessary for a company to maintain a healthy financial position as it pays dividends with free cash flows. In this article, I look at three companies that fit this profile: Intel Corporation (NASDAQ:INTC), Cisco Systems, Inc. (NASDAQ:CSCO) and General Electric Company (NYSE:GE). All three companies are presently undervalued.
Intel’s dividend profile and valuation
Intel Corporation (NASDAQ:INTC) is a semiconductor chip maker. At present, Intel is trading at attractive multiples. Intel is trading at a discount based on its price-earnings (PE) ratio of 12, compared to the industry average of 41.5. Over the years, Intel has been paying solid and consistently-increasing dividends.
At present, Intel Corporation (NASDAQ:INTC) offers a quarterly dividend of $0.2250 per share. In 2012, Intel Corporation (NASDAQ:INTC) paid a dividend of $0.87 per share. In the past three years, it has been consistently able to increase its payout ratio based on dividends. It has stretched its payout ratio from 31.3% to 44% in the trailing twelve months (ttm).
How are dividends safe?
Recently, Intel Corporation (NASDAQ:INTC) announced first-quarter 2013 results with $2 billion in net income. Its earnings were down by 19% compared to the last quarter, mainly due to softness in the market. Still, Intel has been anticipating increasing revenue growth in the low single-digits, percentage-wise. On top, the company has potential to generate strong cash flows.
At the end of Q1, its operating cash flow stood at $4.3 billion, with $1.1 billion returned in dividends and $625 million in its share re-purchase program. Its free cash flows adequately covered the cost of the dividends. In the ttm, its free cash flows totaled $9.94 billion while dividend payments were $4.4 billion. The company’s low debt also increases its ability to sustain dividends.
Cisco’s dividend profile and valuations
Over the past two years, Cisco Systems, Inc. (NASDAQ:CSCO) has turned out to be a solid stock for dividend investors. In the past year alone, it has increased dividends by 112.2%. At present, Cisco offers a quarterly dividend of $0.17 per share. At the end of 2012, its payout ratio, based on dividends was 18.8%. Its payout ratio provides it a lot of room to increase dividends.
At present, Cisco Systems, Inc. (NASDAQ:CSCO) is trading at attractive multiples. Cisco Systems, Inc. (NASDAQ:CSCO) is trading at 13.8 times to earnings relative to the industry average of 70.4. At the time of writing, Cisco is trading at $21 per share which is well below analysts’ target price of $26 per share. Additionally, with a forward PE of 11.5 the stock has potential to appreciate further.
How are dividends safe?
The company has a solid enough financial situation to back its dividends. Its top-line growth is incredible. In the past three years, its revenue growth stands at 8.3% while the industry average is -3.5%. Additionally, it has potential to convert sales into profits at high margins. In the ttm, its operating and net margins stand at 22.4% and 19.7%, respectively.
Cisco Systems, Inc. (NASDAQ:CSCO)’s strong profitability enables it to generate solid cash flows year-over-year. Its operating cash flows are growing while its capital expenditure remains flat at $1.1 billion. Additionally, the company has an extremely low amount of debt, which provides it more room to increase dividends.
How General Electric is undervalued
General Electric Company (NYSE:GE) is a solid pick among diversified industrial stocks. At present, the stock is trading at a discount based on its PE and P/B (price-to-book) ratios of 16.3 and 1.9, respectively. At the time of writing, the stock is trading at $23 per share, which is well below analysts’ target price of $28 per share.